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Amazon Expansion Renews Delivery Debate: Analysts

PHILADELPHIA — The expansion of AmazonFresh into Los Angeles recalls an earlier period of home delivery experimentation during the dot-com era, but the financial model hasn’t become more favorable in the interim, according to an analyst panel here.

Two veteran financial analysts addressed the outlook for this business at the 2013 MPA/PBAA Retail Marketplace, as part of a panel focused on the supermarket industry.

“Nothing has changed [in the home delivery model] from 12 years ago, the economics don’t make sense,” said Andy Wolf, an analyst at BB&T Capital Markets.

Wolf recalled riding on a grocery home delivery truck in Boston during the dot-com era to learn how the process worked and impacted the grocery business.

“There were traffic jams and parking tickets,” he said, adding that deliveries were very slow-going. “It costs a lot of money to drive a truck, and when it involved refrigerated product, there were high energy costs. It was so nonsensical.”

He said grocery home delivery remains a niche business that doesn’t represent a huge threat to brick and mortar players.

Meredith Adler, an analyst with Barclays Capital, said the home delivery failures that stemmed from that earlier era underscored the challenges in these models, something Amazon will face as it expands.

“I’m interested that Amazon wants to go into Los Angeles,” she said. “Has anyone driven around Los Angeles? Traffic is horrendous. In order to meet commitments to deliver food at certain times, they’ll have to build a lot of depots to ship product. They’ll have to spend what a store spends for real estate. It kind of doesn’t make a lot of sense.”

She said that home delivery operators are faced with the daunting if not impossible task of charging enough to cover costs but not so much that it will alienate potential customers.

Amazon has attempted to address this challenge by setting a $299 charge for a 12-month “Amazon Prime Fresh” membership following a free delivery period for the first 90 days.

Amazon, however, has a big advantage over its brick and mortar rivals, Adler emphasized, because the company views grocery not as a money maker in itself, but as a component in bundled deliveries with other products.

“The problem for competitors is that Amazon doesn’t need to make money,” she said. “It’s hard to compete with that.”

Amazon is reportedly expected to expand into San Francisco later this year, and to enter as many as 20 cities over the next two years.

The MPA/PBAA conference focused on the magazine industry, and supermarkets are the prime retail outlet for single-copy sales, which accounts for the interest of attendees in supermarket trends.

The analysts also addressed the gradually improving economic picture for supermarkets, store format changes, and the prospects for a range of retail channels that sell food.